Posts Tagged ‘economies of scale’

Season 7, Episode 8: Your students will find this pitch by a fellow millennial especially motivating. Jeff Overall’s business, PolarPro, is in a very competitive space. After he delivers his intro speech, stop the video (time 1:49) and ask students what type of market structure he is operating in and why. What profit maximizing strategies can he employ in this type of market? Constant innovation and/or economies of scale are critical for success. Why? Innovations in this market are easily copied and accompanying profits quickly competed away. Economies of scale provide a variable cost advantage that will price smaller competitors out of the market. Jeff chose constant innovation as his strategy since he currently lacks the capital investment to lower production costs.
An interesting comment by Jeff at 4:25 is sure to spark students’ attention. In Jeff’s case, what would have been the opportunity cost of using his student loan toward books? Immediately following that, a discussion of opportunity costs continues with Jeff’s decision to make higher profits or invest in R & D.

Season 3, Episode 7: In season 2, Kim Nelson, owner of Daisy Cakes, made a deal with Barbara Corcoran. This update on that deal emphasizes how sales have rapidly increased since that time, forcing Kim to move from a small kitchen with 4 ovens to a larger bakery with walk-in ovens. Now, she is able to expand production from baking 8 to 160 cakes at a time. Discuss the difference between fixed costs and variable costs in this clip with your students. Note that in the short-run the small kitchen and 4 ovens were fixed costs, but in the long run they are variable costs. Kim’s deal with Barbara has allowed her to expand her capital and have lower per unit costs due to economies of scale. Ask students to identify other costs involved with operating Daisy Cakes and categorize them as either fixed or variable costs.

Season 3, Episode 11: Students often find production and costs mind numbing. This clip helps connect some of these concepts to the real world. “Wine Balloon,” owned by Eric Corti, produces a wine-preserving product. The product currently sells for $22 and costs $6.50/unit when production is at 700 units. The sharks advise that the potential to cut costs are huge and hence increase revenue. If he produces 100,000 production cost per unit will fall to $2.50. That would be a $4/unit savings! This nicely illustrates economies of scale. Students can be asked to calculate total costs using the average cost formula for both low and high production levels. Other exercises include drawing short and long run output expansion average costs curves and average fixed costs curves.